What Happens to Your Pension When You Leave a Firm Before Retirement

When you work at a firm that offers a pension plan, it is most often a registered pension plan, in the form of either a defined benefit plan or a defined contribution plan. If you leave the company prior to retirement age, typically defined as age 55, the funds must remain within a registered locked-in plan for the purpose of providing a retirement income. Locked-in funds must retain their characteristics and cannot be transferred to your regular registered retirement savings plans (RRSPs).

Because the rules can vary from province to province and federally, it can help to have a general understanding of your type of registered pension plan, how the funds are transferred when you leave your employer and how locked-in accounts work.

Here’s the rundown on defined benefit and defined contribution plans and the transferability rules for each.

Defined benefit plans—formula-based and employer-run

Retirement income formula: The amount of income that you receive at retirement is defined based on a formula using your age and years of service.

Investment decisions: The employer makes the investment decisions and assumes the risk if there are not enough funds to provide the guaranteed income.

When you leave: You can leave the funds in the plan and take the guaranteed income based on the formula of age and years of service, or transfer the commuted value, as calculated by an actuary, to a locked-in RRSP or locked-in retirement account (LIRA).

Defined contribution plans – Based on your investments and contributions

Retirement income formula: The amount that the employee and employer contribute to the plan is defined.

Investment decisions: The employee makes the investment decisions and assumes the risk, as the amount of income at retirement is not known. Retirement income can begin as early as age 55 and as late as age 72.

When you leave: You must transfer the funds from the group plan to an individual plan, either a locked-in RRSP or a LIRA.

The authorities that govern your pension

The difference between a locked-in RRSP and LIRA has to do with the pension legislation governing your employer’s pension plan. If your pension is governed by federal pension legislation, then your pension can be transferred into a locked-in RRSP. If your pension is governed by provincial legislation, then it’s transferred into a LIRA.

All registered pension plans are governed by the pension legislation in the province you worked in, or by the federal Pension Benefits Standards Act.